Can we afford a holiday home?

S

sceach

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Age: 30
Spouse’s/Partner's age: 28

Annual gross income from employment or profession: €56000
Annual gross income of spouse: €40000

Type of employment: Both Private sector, pretty secure.
In general are you:
(a) spending more than you earn, or
(b) saving? Saving about €1000 each month.

Rough estimate of value of home 350k
Amount outstanding on your mortgage: 400k
What interest rate are you paying? 2.7%

Other borrowings – car loans/personal loans etc None

Do you pay off your full credit card balance each month? Pay it off each month.
If not, what is the balance on your credit card?

Savings and investments: 25k cash on deposit.

Do you have a pension scheme? Yes, both in DB schemes and also have an AVC lump sum.

Do you own any investment or other property? No

Ages of children: 1 and 3

Life insurance: Yes


What specific question do you have or what issues are of concern to you?
We would love to build a holiday home in a part of the country we both love. The plan would be to retire there eventually (three years later than expected by the looks of things!). I think we can do it by borrowing 125k. I’m wondering can we afford it?
 
If I were you, I'd focus on getting the mortgage down a bit first, as you're currently 50k in negative equity.

If rates went up by 2%, you'd be paying about 450 a month more, would you be comfortable with that? How would you cope if one of you lost your job? I'm playing devil's advocate here, but you need to consider some of the more negative but realistic scenarios before overextending yourselves.

Consider also the positives, I presume it would be an advantage to have the holiday house while your children are young rather than a few years down the line. Could you rent it out at all? I think you need to do the sums including stress testing both mortgages.
 
A holiday home is an incredibly expensive luxury that became mainstream in the madness of the post Celtic Tiger property bubble. Previously it would be more associated with the moneyed classes than the mildly comfortable middle classes.

I'm assuming from your savings and the mortgage sum mentioned that you intend to spend EUR 150,000 on the build. I'll also assume for the sake of keeping things simple that you don't go over the budget as is common with self-builds.

It's possible that over the course of twenty years that between the EUR 25,000 capital employed and the interest on the EUR 125,000 mortgage that the combined opportunity cost and mortgage cost will equal the EUR 150,000 budget. That is before you consider paying off the mortgage principle. There are also other considerations such as utilities and property taxes.

Effectively you are possibly locking yourself into paying over EUR 7,500 per annum on holiday accommodation over the next twenty years. It would be wise to examine what EUR 7,500 per annum would buy you in hotel / self-catering accommodation over the next twenty years.

Your alternative is to invest your 25,000 in capital elsewhere and continue to save and invest. You will have the option of choosing where you holiday over the next 20 years instead of being locked into this one location. You will have the option of not holidaying in a given year, and potentially saving yourself EUR 7,500 on accommodation alone, if you are overstretched financially.

You could argue that you will get rental revenue from the holiday property. Then it becomes a investment/holiday property and aside from potentially overpaying for your holiday accommodation you are looking at an investment that may not be performing.

It's understandable to overpay for a primary residence for emotional reasons but can you really afford to overpay for your holiday accommodation for emotional reasons?
 
sceach said:
We would love to build a holiday home in a part of the country we both love. The plan would be to retire there eventually (three years later than expected by the looks of things!). I think we can do it by borrowing 125k. I’m wondering can we afford it?
Click to expand...

What about the negative equity, don't you think you need to do something about that first? Why would you want to put yourselves further in debt until you had more equity and more savings as a cushion?
 
i think now is not the right time. Your children quite young and in my experience cheaper at that age so you have more disposable income. You are currently saving 2000 a month, thats great keep it up and maybe even look at cutting more corners for a while to get a bigger portion of your existing mortgage down.

With two mortgages that might both be in negative equity is not a great idea.
 
OP only saving €1000 a month .... with their salaries I would think that more could be saved by tightening up on spend.

As has been advised many a time on AAM .... keep a spending diary. It will help focus your finances.
 
I think a holiday home is a great idea for a young family but only if you can comfortably afford it and with that mortgage it would be too risky now. Would you not consider a mobile home in the area you like? for the kids it has all the benefits - getting to know a group of friends in a different locality, familiarity of going to the same place every year - much lower overheads for you.....with possibility to upgrade if the ship comes in!

Having grown up with a family holiday home and now with one myself I think its a completely different thing to going away to different places every year and it is a great way of bringing family together.(at least until the teenagers refuse to come!)
 
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